WPP Group is close to buying South Korea's second-largest agency, LG Ad, the
in-house agency for LG Group. Once the deal is completed, it will put more than 50% of the ad industry in South Korea -- the world's 10th-largest ad market -- in the hands of multinationals.
Until recently, the biggest Korean agencies were owned by powerful conglomerates, known as "chaebols," that are now under pressure from the government and banks to focus on their core businesses and divest other assets such as in-house ad agencies. That sell-off has allowed multinational agencies, which controlled just 7.6% of the Korean ad market in 1998, to increase their share to 36% last year and at least 47% this year, according to the Korean Federation of Advertising Associations.
WPP's acquisition of the 31% stake in LG Ad held by LG Group's two founding families, the Koos and the Huhs, will give WPP management control; the deal is expected to be completed in a month or two. The purchase price could not be learned, but based on market capitalization the 31% stake is valued at $42 million.
LG Group makes everything from consumer electronics to chemicals, and sells LG cosmetics in Asia. The company's "restructuring plan requires LG Group to sell its ad agency," said Han Seung Ho, an advertising analyst at Hyundai Securities.
An LG executive confirmed the agency is "positively engaged in negotiations" with WPP. The agency holding company had no comment.
Not only is South Korea the world's 10th-largest ad market, it's one of the few countries where ad spending, expected to reach $5 billion this year from $4.4 billion last year, is growing rapidly. Multinational agencies hope that buying the in-house agency of a Korean marketer with a big global ad budget will give them the inside track on those ad dollars. LG Group, for instance, spends about $200 million outside Korea, divided among many agencies.
But South Korea is full of pitfalls. The biggest problem in buying an in-house agency with one big client is hanging on to that client when it no longer owns the agency. About $400 million of LG Ad's 2001 billings of $492 million are from LG Group, although the agency also handles Nike, Korean Air and local banks.
Contracts frequently require the seller to commit to keeping its business at the acquired agency for three to five years. Last year, for example, WPP bought Ad Venture, now merged with J. Walter Thompson Co., with a guarantee that one of its clients, consumer-goods marketer Aekyung, would stay for seven years. "Without this guarantee, WPP cannot be confident about its success in Korea," Mr. Kim said of the current negotiations with LG.
Others believe a client is likely to be eager to escape when the contract ends. "What happens after they're forced to work with you for five years?" said one Korean adman. "The client will probably leave for the sake of freedom, and you've bought a five-year company. It's a bad strategy."
And it doesn't always work. In the first big chaebol sell-off, Cordiant Communications Group bought 80% of Hyundai Group's in-house agency, Diamond, for $100 million in an effort to build Hyundai cars into a global client for Bates Worldwide. But after members of the Chung family that controls Hyundai Group had a falling out, the family members in charge of the car group were no longer the ones involved in the ad agency.
Bates lost its U.S. Hyundai business earlier this year, and other agencies are chipping away at the Korean account, despite a contract signed in 1999 guaranteeing Diamond Bates the business for five years. This year Diamond Bates lost pitches for two Hyundai models, Verna and Avante, to other agencies.
Most of the agencies still controlled by chaebols are small ones, except Samsung-owned Cheil Communications, and Daehong Communications, South Korea's No. 1 and No. 4 agencies, respectively. Cheil, considered part of Samsung's internal marketing efforts and intent on building its own international network, isn't for sale. Daehong's future is unclear. Daehong is owned by Lotte Group, a Korean-Japanese conglomerate active in areas as diverse as confectionery, hotels and retailing.
LG, like other Korean shops, has no international network. Industry executives familiar with the WPP deal said LG is likely to work closely with Young & Rubicam and use Y&R's network. JWT has been merged into Ad Venture to form WPPMC Korea and Ogilvy & Mather Worldwide has international accounts that are potential conflicts with LG, including IBM Corp. and Motorola. Y&R handles Sony Corp. in the U.S., but LG isn't very active in the U.S. market.